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Despite tremendous efforts by businesses across the world, a lack of diversity remains an issue at all levels. And it is not just within business organizations where women, people of color and other minorities are traditionally underrepresented; there are also vast disparities in representation within the venture capital community that funds many of these businesses.
Since diverse investors are underrepresented, they have been unable to participate in the substantial profits VCs have generated, particularly from Silicon Valley and the tech sector. As a result, the wealth gap for minority communities remains unacceptably large.
Fortunately, recent years have seen a substantial increase in investments in minority-owned businesses. But what about diversity within those investment firms? Unfortunately, venture capital firms have made very little progress on diversity in the past decade.
Several new funds are looking to change the narrative, actively recruiting participation of more-diverse limited partners. While there are still many miles to go before minority representation in the VC community more closely reflects the population at large, these firms have at least started the journey.
Lack of diversity in venture capital
For a field that has consistently extolled the benefits of diversifying assets, the financial world has been notoriously slow to diversify within its own ranks. Granted, the number of female VC leaders has rebounded slightly. According to a survey by Deloitte, women only fill 14 percent of investment partner or equivalent-level positions.
The situation is even more glaring for people of color. The same Deloitte survey found that at the investment partner level and higher, only 15 percent were Asian or Pacific Islander, 3 percent were Black or African American, and 3 percent were Latine.
This lack of diversity is not limited to venture capital investment. People of color are also far less likely to be individual investors than similarly situated white people. Fortunately, it has become far simpler for individuals to invest in the stock market — fractional share purchases, low account opening minimums, etc. — helping to eliminate barriers for people of color to successfully invest. Venture capital similarly needs to ease access for women and people of color.
A lack of transparency reinforces lack of diversity
Diversity among VC leadership and investment partners will continue to be difficult to address because it is often difficult to assess diversity representation at any given time. Information about the limited partners of VC firms is traditionally hard to obtain. Similarly, cap tables — essentially lists of who owns how much of a company — for the companies receiving VC funding are typically deemed confidential.
While there are many reasons investors, venture capital firms and startups might wish not to widely disseminate specific investment information, it makes demonstrating diversity issues more difficult. And without hard evidence, it is too easy for people to dismiss problems rather than address them.
There are now resources available that offer detailed data on diversity in companies and VC funding, including Crunchbase’s Diversity Spotlight. But these resources still are forced to rely largely on companies voluntarily submitting data.
Studies and surveys have consistently shown that woman- and minority-led businesses are more likely to obtain VC funding when venture capital teams are more diverse. And these businesses are also more likely to seek out diverse VC teams. During the COVID crisis, companies invested significant resources in allowing their workforce to become more remote. It’s time they also invest in helping their workforce become more diverse.
Increased diversity leads to better performance
Investment advisers frequently counsel investors to diversify their own portfolios. According to London-based financial investor Alexander Williams of Hosting Data, it’s less risky to invest in stocks and assets today than before, saying: “Many of the best investment platforms will allow you to purchase multiple types of market assets and instruments. A diverse portfolio typically leads to better long-term investment gains since you’re less susceptible to market risk or declines.”
Data now shows that diversity within venture capital teams and diversity within the companies they invest in leads to similar increases in investment gains. Harvard Business Review found that IPOs for companies with diverse investment teams outperformed their less diverse peers by up to 32 percent. Performance of the underlying companies also increases when they have diverse leadership, with up to a 35 percent increase in return on equity when boards are diverse with respect to both gender and race.
VC firms spend a lot of time analyzing and following data about the businesses in which they invest. The positive financial effects of improving diversity are undeniable, and VC firms would do well to follow the data about their own industry as well.
There are firms affirmatively focused on diversity
The number of female- and minority-led investment firms has increased in the past decade, although the pace still is insufficient. Success at these firms, however, will continue to drive the trend. One firm actively seeking participation from diverse limited partners is Acrew Capital, founded in 2019 by well-respected venture capital veteran Theresia Gouw.
Citing the continued lack of diversity among investment partners and the known positive impacts of diverse investment teams, Acrew recently launched its Diversity Capital Fund, which was created to “bring more diverse shareholders to later-stage investments of companies that are IPO bound, in turn increasing representation of women and PoC leaders in the ownership of such companies.“
Acrew DCF is literally putting its money where its mouth is. The Acrew team currently comprises 63 percent underrepresented minorities, with 88 percent being women or people of color.
Conclusion
While the venture capital industry has made significant strides in terms of investments in companies founded or led by women and people of color, it still has a long way to go to diversify itself. But there is good reason for hope.
A number of new funds and initiatives are focusing specifically on increasing inclusion among VC leadership. And the data is clear that increased diversity will not only help decrease wage and wealth inequalities, but will also lead to better financial performance by VCs. It’s a win-win proposition.
Kiara Taylor is an expert on the integration of finance and technology. She writes about the impact of both micro and macro trends on global finance.
